<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-27538
-------
RAPTOR SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7372 51-0337926
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
---------------
RAPTOR SYSTEMS, INC.
69 HICKORY DRIVE
WALTHAM, MASSACHUSETTS 02154
(Address of Principal Executive Offices)
(617) 487-7700
(Registrant's Telephone Number, Including Area Code)
---------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No
--- ---
As of April 20, 1997 there were 13,296,557 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
- Page 1 of 17
- Exhibit Index is on Page 15
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<PAGE> 2
RAPTOR SYSTEMS, INC.
TABLE OF CONTENTS
PART I - CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: PAGE
------
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997
AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
<PAGE> 3
PART I. CONSOLIDATED FINANCIAL INFORMATION
- ---------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
RAPTOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $27,295,143 $37,567,372
Marketable securities ................................. 26,458,533 15,396,866
Accounts receivable, less allowances of $592,047 and
$431,000, at March 31, 1997 and December 31, 1996,
respectively ....................................... 4,300,307 4,048,456
Other current assets .................................. 1,068,418 733,507
----------- -----------
Total current assets .......................... 59,122,401 57,746,201
----------- -----------
Net property and equipment ............................ 1,577,356 1,401,447
Equity investments .................................... 4,039,953 4,036,001
=========== ===========
Total assets .................................. $64,739,710 $63,183,649
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... 273,976 481,266
Accrued liabilities ................................... 2,408,389 1,994,329
Deferred revenue ...................................... 1,745,428 1,580,289
----------- -----------
Total current liabilities ..................... 4,427,793 4,055,884
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value;
3,004,161 and 5,000,000 shares authorized at
December 31, 1996 and March 31, 1997,
respectively; none issued and outstanding ............ -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,296,051 and 13,102,528 shares
issued and outstanding at March 31, 1997 and
December 31, 1996, respectively ..................... 132,961 131,025
Additional paid-in capital ............................ 61,249,063 60,989,463
Accumulated deficit ................................... (320,715) (1,177,620)
Cumulative translation adjustment ..................... (11,035) (1,746)
Unearned compensation ................................. (738,357) (813,357)
----------- -----------
Total stockholders' equity .................... 60,311,917 59,127,765
----------- -----------
Total liabilities and stockholders' equity .... $64,739,710 $63,183,649
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
RAPTOR SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenue ................................ $ 5,640 $ 2,068
Cost of revenue ........................ 356 152
----------- ----------
Gross margin ........................... 5,284 1,916
Operating expenses:
Selling and marketing ................ 2,840 1,597
Research and development ............. 939 567
General and administrative ........... 897 550
----------- ----------
Total operating expenses ..... 4,676 2,714
----------- ----------
Operating income (loss) ................ 608 (798)
Interest income net ................... 710 369
----------- ----------
Income (loss) before income taxes ...... 1,318 (429)
Provision for income taxes ............. 461 --
----------- ----------
Net income (loss) ...................... $ 857 $ (429)
=========== ==========
Net income (loss) per common and common
equivalent share ....................... $ .06 $ (.05)
=========== ==========
Weighted average common and common
equivalent shares outstanding .......... 15,011,893 8,519,351
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
RAPTOR SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED- IN THOUSANDS)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................. $ 857 $ (429)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation ...................................... 182 67
Provision for reserve allowances .................. 161 93
Compensation stock option expense ................. 75 75
Changes in operating assets and liabilities:
Accounts receivable .............................. (413) (381)
Other assets ..................................... (335) (67)
Accounts payable ................................. (207) 105
Accrued liabilities .............................. 414 (308)
Deferred revenue ................................. 165 (151)
-------- --------
Cash provided by (used in) operating activities .... 899 (996)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ............. (358) (146)
Purchase of marketable securities ............... (11,062) --
Equity investment in common stock ............... (4)
-------- --------
Cash used in investing activities ............... (11,424) (146)
-------- --------
FINANCING ACTIVITIES:
Amounts payable to related parties ............... -- 231
Proceeds from issuance of common stock ........... 262 45,771
Net proceeds from issuance of preferred stock .... -- 5,000
Issuance of warrants ............................. -- 1,000
Payment of bank debt ............................. -- (575)
-------- --------
Cash provided by financing activities .............. 262 51,427
-------- --------
Effects of exchange rate changes on cash ........... (9) --
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,272) 50,285
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 37,567 1,890
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 27,295 $ 52,175
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
RAPTOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The consolidated financial statements of Raptor Systems, Inc. (the "Company"
or "Raptor") for the three months ended March 31, 1997 and 1996 are unaudited
and reflect all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31, 1996
filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets, liabilities and accrued litigation at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results expected for the full year ending December
31, 1997.
2. RISKS AND UNCERTAINTIES:
The Company invests its cash in deposits with commercial banks, and in money
market funds, commercial paper and government securities. The Company has not
experienced any losses to date on its invested cash. The values at March 31,
1997 and December 31, 1996 approximate fair value.
The Company sells its products to a wide variety of customers in a variety of
industries. The Company performs ongoing credit evaluations of its customers but
does not require collateral or other security to support customer receivables.
The Company maintains reserves for credit losses and such losses have been
within management's expectations.
3. COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Net income (loss) per common share is computed based upon the weighted average
number of common shares and common equivalent shares outstanding. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive.
4. LITIGATION:
On February 27, 1995, Lightburn and Associates, Inc. ("LAI"), a former reseller
of Raptor products, commenced an action against Raptor in the United States
District Court for the District of Maryland. This action is based on allegations
that Raptor engaged in unfair competition, fraud, intentional and/or negligent
misrepresentation, tortious interference with business relationships and breach
of contract by entering into direct contractual arrangements with two customers.
On December 9, 1996, the Court granted Raptor's motion for summary judgment on
all claims that had been asserted against Raptor. The Court similarly entered an
order dismissing the counterclaims made by Raptor. As set forth in the Court's
order, the case is now closed, subject to any appeal rights the parties may
have. LAI has filed an appeal of the Court's decision, the outcome of which is
not known at this time.
<PAGE> 7
On June 10, 1996, Raptor and one of its customers were sued by a former employee
(a sales representative of Raptor whose employment had been previously
terminated by Raptor) claiming that he is owed certain commissions on sales of
Raptor products to this customer. Raptor will vigorously defend the claims
asserted in this action. Discovery in this litigation is ongoing and at this
time Raptor is unable to determine the ultimate outcome of the litigation.
Litigation costs are included in general and administrative expenses. The
company believes that the ultimate outcome of the above litigation will not have
a material adverse effect on its financial position.
5. CHANGES IN STOCKHOLDERS' EQUITY:
Changes to stockholders' equity for the period from December 31, 1996 to March
31, 1997 were as follows:
<TABLE>
<S> <C>
Total stockholders' equity at December 31, 1996 .......................... $ 59,127,765
Proceeds from:
Exercise of stock options to buy 182,988 shares of common stock ...... 49,519
Purchase of 10,535 shares for Employee Stock Purchase Plan ........... 212,017
Unearned compensation ................................................ 75,000
Change in the Cumulative Translation Adjustments account ............. (9,289)
Income for the quarter ended March 31, 1997 .............................. 856,905
============
Total stockholders' equity at March 31, 1997 ............................. $ 60,311,917
============
</TABLE>
As a result of these transactions the common shares issued and outstanding
increased from 13,102,528 at December 31, 1996 to 13,296,051 at March 31, 1997.
6. SUBSEQUENT EVENTS:
On May 9, 1997 the Company entered into an agreement with Open Market, Inc. of
Cambridge, Massachusetts, to license Open Market's secure intranet technology
known as Axcess. The agreement gives the Company a perpetual license to the
product, including the underlying product technology, and worldwide marketing
and distribution rights. The Company will continue development of the technology
and expects to introduce new secure intranet products based on the Axcess
technology in the third and fourth quarters of 1997. The acquistion cost is
estimated to be approximately $6.5 million. The Company intends to charge a
substantial portion of the acquisition costs in the second quarter of 1997 as an
in process research and development expense. The treatment of these costs is
consistent with the Company's on going policy related to research and
development costs. The portion of the acquisition costs that is not charged to
operations in the second quarter will be treated as purchased technology related
to current products and amortized over the appropriate period. Financial data
related to this acquisition are not final. Therefore, pro-forma information
illustrating the combined results after the acquisition have not been provided.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and the Risk Factors outlined in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1996.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are set forth below. The words "believe," "expect," "anticipate,"
"intend," "estimate," and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. Factors that might cause such a difference are discussed in the
section entitled "Certain Factors that may Affect Future Results" below.
INTRODUCTION:
Raptor Systems, Inc. (the "Company" or "Raptor") develops, markets, licences and
supports a family of integrated network security software products that provide
comprehensive, enterprise-wide security for organizational networks, including
networks that are connected to the Internet. The Company's application-level
Eagle firewall and EagleConnect virtual private network technology forms the
basis of a network security solution that enables an organization to protect its
network from unauthorized access by internal and external users and to secure
organizational communications over the Internet and internal networks, including
"Intranets." The Company's integrated enterprise-wide network security solution
consists of individual product modules that secure organizational networks,
including networks connected to the Internet, LANs (local area networks) and
Intranets, mobile PC users and remote sites. The Company's product modules
interact seamlessly, are easy-to-use and are supported by a common management
and monitoring capability that enables a network administrator to manage the
security of a large, geographically dispersed organizational network from a
single location. Raptor's network security solutions are designed to enable
organizations to protect valuable data, extend the boundaries of organizational
networks without compromising network integrity and capitalize on the emergence
of the Internet as a medium of communications and commerce.
RESULTS OF OPERATIONS:
NET INCOME:
The Company generated net income of $857,000 ($.06 per share) on revenues of
$5,640,000 in the First Quarter of 1997 compared to a net loss of $429,000 ($.05
per share) on revenues of $2,068,000 in the First Quarter of 1996.
REVENUES:
Total revenues increased 173% in the First Quarter of 1997 over the First
Quarter of 1996. The primary reasons were the continued acceptance by the
marketplace for the Company's firewall products, the introduction of THE
WALL(TM), a low end firewall solution for small companies, local government
agencies and local school districts, in the First Quarter of 1997, and the
continued addition of Value Added Resellers
<PAGE> 9
and Master Resellers. 82% of the First Quarter revenue came through resellers
and 18% resulted from direct sales efforts. Revenue by geographical region as a
percentage of total first quarter revenue is as follows: US and North America
77%, Europe and Asia 23%. During the First Quarter of 1997 the Company opened
sales offices in Germany and Japan.
Windows NT-based products accounted for 64% of the First Quarter's shipments
while Unix-based products accounted for 36%. In excess of 90% of the Company's
business came from firewalls. During the first quarter of 1997 the Company
shipped approximately 550 firewall evaluation units, 81% of which were Windows
NT-based. The average selling price for the first quarter of 1997 was $5,111, a
decrease of approximately $465 from the fourth quarter 1996's average selling
price of $5,576. The reduction in the average selling price of its products is
largely due to the change in the mix of the products sold and the channels the
products are sold through. Non-firewall products, like Eagle NetWatch and
WebNOT, have lower selling prices than the firewall products. As the Company
sells more non-firewall products the average selling price on all of the
Company's products will decrease. During the first quarter the Company
recognized revenue on 994 units of THE WALL(TM), which has a market price of
$995. The analysis above does not take into account the effects of THE WALL(TM)
on the average selling price, the average selling price for THE WALL(TM) product
in the first quarter of 1997 was $570.
COST OF REVENUES:
Cost of revenues includes the cost of telephone support, manuals, packaging,
diskettes and fulfillment costs. In addition, cost of revenues includes
royalties paid to third-party developers, inventory obsolescence reserves and
the costs associated with product upgrades. Gross margin as a percentage of
revenues for the First Quarter of 1997 remained the same as compared to the
First Quarter of 1996.
OPERATING EXPENSES:
The Company's operating expenses, and the respective percentage of revenues for
the First Quarter of 1997 as compared to First Quarter of 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------
% of % of
1997 Revenues 1996 Revenues
--------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C>
Sales and Marketing $2,840 50% $1,597 77%
Research and Development 939 17% 567 27%
General and Administrative 897 16% 550 27%
------ -- ------ ---
$4,676 83% $2,714 131%
====== == ====== ===
</TABLE>
Total operating expenses decreased as a percentage of revenues to 83% in the
First Quarter of 1997 compared with 131% in First Quarter 1996. This decrease is
primarily the result of increased revenues and the effects of investments made
in all departments in 1996. The general and administrative expenses for the
quarter ended March 31, 1997 contain a $75,000 charge to income related to
unearned compensation for employee stock options.
Sales and marketing expenses, which include salary, commission, advertising,
travel and other selling-related expenses decreased to 50% of revenues in the
First Quarter of 1997 compared to 77% of revenues in the First Quarter of 1996.
Research and development expenses, which include salary, payments to independent
contractors and other costs associated with the development of new products and
the enhancement of existing products decreased to 17% of revenues in the First
Quarter of 1997 compared to 27% of revenues in the First Quarter of 1996. The
Company anticipates that its expenditures in this area will increase during 1997
as the Company adds features and functionality to its products, makes its
products available on additional platforms and continues to develop new
products.
<PAGE> 10
General and administrative expenses increased to 16% of revenues in the First
Quarter of 1997 compared to 27% of revenues in the First Quarter of 1996.
General and administrative expenses include salary, rent, and other expenses
associated with the general management and administration of the Company. In the
First Quarter of 1996 $75,000 was charged to the general and administrative
department for the settlement of a litigation claim.
The number of employees increased 10% to 121 at March 31, 1997 compared with 110
at December 31, 1996. Employment has increased significantly to support higher
revenues, with a majority of this growth occurring in the sales and marketing
and research and development departments.
LIQUIDITY AND CAPITAL RESOURCES:
The Company considers all short-term investments, which consist of money market
accounts and Government securities, with original maturities of less than 90
days, to be cash equivalents. In addition, securities held with maturities
greater than 90 days but less than a year are classified as marketable
securities.
Cash, cash equivalents and marketable securities increased from $52,964,000 at
December 31, 1996 to $53,754,000 at March 31, 1997. This increase of $789,000 is
attributable to $262,000 related to the sale of the Company's stock to employees
and $700,000 in interest income for the first quarter.
The Company believes that its existing cash and marketable securities balances
together with cash generated from operations will be sufficient to meet the
Company's working capital, financing and capital expenditure needs through at
least December 31, 1997. The Company continues to investigate the acquisition of
key technology, complementary product lines and other companies, all of which
may be financed by a variety of sources.
RECENT EVENTS:
On May 9, 1997 the Company entered into an agreement with Open Market, Inc. of
Cambridge, Massachusetts, to license Open Market's secure intranet technology
known as Axcess. The agreement gives the Company a perpetual license to the
product, including the underlying product technology, and worldwide marketing
and distribution rights. The Company will continue development of the technology
and expects to introduce new secure intranet products based on the Axcess
technology in the third and fourth quarters of 1997. The acquistion cost is
estimated to be approximately $6.5 million. The Company intends to charge a
substantial portion of the acquisition costs in the second quarter of 1997 as an
in process research and development expense. The treatment of these costs is
consistent with the Company's on going policy related to research and
development costs. The portion of the acquisition costs that is not charged to
operations in the second quarter will be treated as purchased technology related
to current products and amortized over the appropriate period. Financial data
related to this acquisition are not final. Therefore, pro-forma information
illustrating the combined results after the acquisition have not been provided.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are set forth below. The words "believe," "expect," "anticipate,"
"intend," "estimate," and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward looking statements. The
<PAGE> 11
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, changes in the market, changes in
technology, competition from larger, more established competitors, general
economic conditions, the Company's continued ability to develop and introduce
innovative products, new product announcements from other companies, pricing
practices of competitors, the Company's ability to control costs and its ability
to attract and retain key employees.
Market prices for securities of software companies have generally been volatile.
In particular, the market price of the Company's common stock has been and may
continue to be subject to significant fluctuations. These fluctuations may be
due to factors specific to the Company or to factors affecting the computer
industry or securities markets in general.
The Company derives substantially all of its revenue from its Eagle family of
network security products, all of which are dependent upon the Company's Eagle
application-level firewall. As a result, any factor adversely affecting sales of
this product could have a material adverse effect on the Company.
The market for network security products and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to intensify in the future. Due to the rapid
expansion of the network security market, the Company may face competition from
new entrants in the network security industry, possibly including the Company's
resellers. There can be no assurance that the Company's current and potential
competitors will not develop network security products that may be more
effective than the Company's current or future products or that the Company's
technologies and products would not be rendered obsolete by such developments.
An increase in competition could result in price reductions and loss of market
share. Such competition and any resulting reduction in gross margins could have
a material adverse effect on the Company's business, financial condition and
results of operations. While the Company believes that it does not compete
against manufacturers of other classes of security products (such as encryption
and authentication), there can be no assurance that the Company's customers will
not perceive the products of such other companies as substitutes for the
Company's products.
The Company recently has experienced significant growth in both revenue and in
employees. This growth has resulted in an increase in responsibilities placed
upon the Company's management and has placed added pressures on the Company's
operating and financial systems. In 1995, the Company hired 50 new employees,
including its Chief Executive Officer and other key members of management, to
help it manage this growth. In 1996, the Company hired 42 additional employees
including its Chief Financial Officer. The Company's ability to assimilate new
personnel will be critical to the Company's performance, and there can be no
assurance that the management and systems currently in place will be adequate if
the Company continues to grow or that the Company will be able to implement
additional systems successfully and in a timely manner as required.
The Company's future success depends to a significant extent on its senior
management and other key employees, including key development personnel. The
Company has no employment agreements with any of its employees. The Company also
believes that its future success will depend in large part on its ability to
attract and retain additional key employees. Any inability on the part of the
Company to attract and retain additional key employees or the loss of one or
more of its current key employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company distributes its products primarily through strategic VARs, regional
VARs and international VARs. The success of the Company is therefore dependent
in large part upon the performance of its resellers, and is therefore outside
the Company's control. The Company's relationships with most of its resellers
have been established within the last year, and the Company is unable to predict
with accuracy the extent to which its resellers will be successful in marketing
and selling the Company's products.
<PAGE> 12
In addition, as the network security industry continues to evolve, the Company
plans to develop and introduce new products to address the changing needs of the
evolving network security market. There can be no assurance that the Company
will be able to develop new products or that such products will achieve market
acceptance or, if market acceptance is achieved, that the Company will be able
to maintain such acceptance for a significant period of time. Any inability of
the Company to develop products on a timely basis that address changing customer
requirements may require the Company to substantially increase development
expenditures or may result in a loss of market share to a competitor. Moreover,
products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. The Company has
in the past discovered software errors in certain of its product offerings after
their introduction and has experienced delays and lost revenue during the period
required to correct these errors. In particular, the personal computer hardware
environment is characterized by a wide variety of non-standard configurations
that make pre-release testing for programming or compatibility errors very
difficult and time-consuming. There can be no assurance that, despite testing by
the Company, errors will not occur in new products or releases after
commencement of commercial shipments, resulting in adverse publicity, in loss of
or delay in market acceptance, or in claims by customers against the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
A high percentage of the Company's revenues are expected to be realized in the
third month of each quarter and tend to be concentrated in the latter half of
that month. The Company's orders early in a quarter will not generally be large
enough to assure that it will meet its revenue targets for any particular
quarter. Accordingly, the Company's quarterly results may be difficult to
predict until the end of the quarter, and a shortfall in shipments or contract
orders at the end of any particular quarter may cause the results for that
quarter to fall short of anticipated levels.
Prior to 1996, there was no public market for the Company's Common Stock. In
addition, in recent years the stock market in general, and the market for shares
of small capitalization companies in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
General market price declines or market volatility in the future could have a
material adverse effect on the market price of the Common Stock.
<PAGE> 13
PART II. OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS:
No reportable events have occurred which would require modification of the
discussion under Item 3 - Legal Proceedings contained in the Company's Report on
Form 10-K for the year ended December 31, 1996. See Note 4 to the Consolidated
Financial Statements contained in this Form 10-Q for the period ended March 31,
1997 for additional information related to previously disclosed litigation
proceedings.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.). Exhibit 11 - Statement re: Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
b.) Reports on Form 8-K - None filed for the Quarter ended March 31, 1997
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAPTOR SYSTEMS, INC.
May 14, 1997 /S/ John S. Ingalls
------------------------------
John S. Ingalls
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
May 14, 1997 /s/ John W. Peacock
------------------------------
John W. Peacock
Director of Finance and Controller
(Principal Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 16
EXHIBIT 27 FINANCIAL DATA SCHEDULE 17
<PAGE> 1
COMPUTATION OF EARNINGS PER SHARE:
EXHIBIT 11
RAPTOR SYSTEMS, INC.
<TABLE>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
<S> <C> <C>
Common stock outstanding, beginning of period .......... 13,103 2,450
Weighted average number of shares issued ............... 101 --
Weighted average number of common and common stock
equivalents ....................................... 1,959 6,069
Less: Assumed purchase of treasury shares .............. (151) --
------- ------
Weighted average number of common and common equivalent
shares outstanding ................................ 15,012 8,519
======= ======
Net income (loss) ...................................... $ 857 $ (429)
======= ======
Net income (loss) per common and common
equivalent share ....................................... $ .06 $ (.05)
======= ======
</TABLE>
- ------------
(1) Fully diluted net income per share is the same as primary net income per
share.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 27,295,143
<SECURITIES> 26,458,533
<RECEIVABLES> 4,300,307
<ALLOWANCES> 592,047
<INVENTORY> 0
<CURRENT-ASSETS> 59,122,401
<PP&E> 2,346,074
<DEPRECIATION> (768,718)
<TOTAL-ASSETS> 64,739,710
<CURRENT-LIABILITIES> 4,427,793
<BONDS> 0
0
0
<COMMON> 132,961
<OTHER-SE> 60,178,956
<TOTAL-LIABILITY-AND-EQUITY> 64,739,710
<SALES> 5,640,013
<TOTAL-REVENUES> 5,640,013
<CGS> 355,733
<TOTAL-COSTS> 4,676,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,318,315
<INCOME-TAX> 461,410
<INCOME-CONTINUING> 856,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 856,905
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
